After defaults, Puerto Rico braces for lawsuits

After a new round of defaults on bond payments that were due Jan. 1, Puerto Rico is now bracing for lawsuits from creditors, the Commonwealth’s governor, Alejandro Garcia Padilla, said Monday.

In an interview with CNBC, Gov. Padilla repeated the island’s long-standing request to gain the right to restructure its debt under chapter 9 of the U.S. bankruptcy code, adding that potential lawsuits that result from unilateral defaults are detrimental to all parties involved.

“It will be very costly—that litigation, for the commonwealth and our creditors,” Garcia Padilla said. “Every dollar used to pay lawyers will be a dollar…not available to pay creditors.”

Last week, the Commonwealth announced that it would default on $37 million in agency bonds backed by rum taxes and legislative appropriations. Instead, it would redirect those funds to make payments on the island’s so-called general obligation debt, which is guaranteed by the island’s constitution.

Puerto Rico owes investors about $70 billion and has struggled mightily with payments amid a decadelong recession and a shrinking population.

Both of the island’s recent defaults were on agency debt, while the central government’s bonds, also known as general-obligation bonds, were fully paid. This highlights the fact that not all Puerto Rico bonds are created equal, as different bonds have varying legal protections and are backed by different sources of public revenues.

“This is not political rhetoric this is mathematic. It’s very simply we don’t have money to pay.”
Puerto Rican Gov. Alejandro Garcia Padilla

On Monday, while general-obligation bondholders received full payment, with general-obligation bonds rallying on bond-trading platform Electronic Municipal Market Access, Puerto Rico officials were bracing for lawsuits by creditors that didn’t get paid.

“Our Department of Justice is trying to anticipate any lawsuit we will have, but to be 100% prepared will be very hard,” Garcia Padilla noted.

Gov. Padilla pleaded with Congress to allow the territory to restructure some of its debt to avoid an uncontrolled bankruptcy.

“We are asking for a legal framework that will benefit our creditors and Puerto Rico,” the governor said. “We don’t want to go into bankruptcy, [we] prefer to do it in any other way.”

“This is not political rhetoric, this is mathematic. It’s very simply. We don’t have money to pay,” Padilla told CNBC, echoing comments he made earlier in 2015 about the fiscal condition of the commonwealth.

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